Power bills to fall $250 with electricity reforms

HOUSEHOLD power bills would be reduced by up to $250 a year and the NSW government could save more than $1 billion in infrastructure spending under a raft of changes proposed to the electricity market including full privatisation, smarter regulation and more choice for consumers.

A report to be released today by the Productivity Commission backs the argument advanced by the Prime Minister, Julia Gillard, that the main driver of power prices has been spiralling network costs caused by overinvestment in poles and wires, rather than the carbon price.

It finds power bills have risen by more than 50 per cent over the past five years. Today 25 per cent of the revenue raised is required to provide the infrastructure ''to meet around 40 hours of critical peak demand each year''.

The commission finds if less is spent on infrastructure and if consumers are given the option of risking power blackouts for a few hours a year and are provided technology such as smart meters to help them manage power use when prices are high, there could be significant savings.

It also backs the eradication of green energy subsidies such as feed-in tariffs - rebates for people with rooftop photovoltaics who put power back into the system.

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While the states are now phasing out or capping such schemes, the federal opposition is promising that if elected, it will subsidise 1 million rooftop solar units by 2020, at a cost of $1 billion.

''The Commonwealth government's introduction of a price on carbon should obviate the need for these schemes on abatement grounds,'' the report says.

When Ms Gillard and premiers gather in December for the next Council of Australian Governments meeting, Ms Gillard wants the states to agree to reforms to take the edge off power prices.

Many of the measures she has signalled already, such as smart meters and more efficient investment in infrastructure, are included in the commission's report.

Ms Gillard has accused conservative governments in NSW and Queensland, which still own their power assets, of price gouging. By overinvesting in infrastructure, they receive generous dividends paid for by higher power prices. The Energy Minister, Martin Ferguson, contradicted the Prime Minister, saying the states do not control the regulatory authorities that set the prices.

The commission says electricity operators, private and public, cannot be blamed because they are responding to the regulatory environment. But it recommends all state-owned power assets be sold to minimise temptation for price gouging.

''This would improve efficiency and avoid the conflicting mix of state government influences on their corporations,'' it says.

It concludes that if NSW adopted the reforms, it could defer $1.1 billion in infrastructure spending for five years ''by adopting a reliability framework that took into account consumers' preferences for reliability''. It finds savings across the national network could be $3 billion.

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It also recommends critical peak pricing in which consumers are notified of high-price power periods. Even after paying for smart meters, this measure would save the average household between $100 and $250 a year.

The commission says some reliability standards are too high, due in part to political responses to blackouts ''with costs that exceed consumers' willingness to pay''. ''The benefits of realigning standards to meet consumer preferences appear to be large.''

Phillip Coorey writes on news specialising in policy, politics and budget. Based in our Canberra newsroom, Phil is the Australian Financial Review's chief political correspondent. He is a former chief political correspondent for The Advertiser and The Sydney Morning Herald, and a two-time winner of the Paul Lyneham award for press gallery excellence.